Euro drops as Cyprus bailout spooks depositors

Several analysts remain wary pact will contain euro-area stresses

V.Phani Kumar

LOS ANGELES (MarketWatch) — The euro fell on Monday, hit by worries that the Cyprus bailout deal — which includes a controversial tax on some bank deposits — will serve as a blueprint for future financial aid agreements for troubled countries.

The European shared currency
EURUSD, +0.04%
fell to $1.2855, down from $1.3048 in Asian trade and pulling back from $1.2983 in North America late Friday.

The euro sank to the $1.28 level after Jeroen Dijsselbloem, the Dutch finance minister and chairman of the euro-zone finance ministers, indicated in remarks to Reuters and the Financial Times that, as in the Cyprus deal, levies on certain bank deposits for other troubled countries to secure financial aid could be imposed.

Dijsselbloem later tried clarify his comments, saying in a statement that “macroeconomic adjustment programs are tailor-made to the situation of the country concerned and no models or templates are used.”

The euro
EURJPY, -0.03%
fetched 120.87 Japanese yen compared with ¥122.56 on Friday.

The euro had gained overnight after euro-zone finance ministers, known as the Eurogroup, struck a 10 billion euro ($13 billion) bailout deal with Cyprus, thereby preventing the collapse of the island nation’s banking system.

To secure the deal, Cyprus agreed to levy deposits of more than €100,000 in the two of the country’s largest banks — Popular Bank of Cyprus, or Laiki Bank, and Bank of Cyprus — and to restructure the banks. The tax on some bank deposits is an unprecedented.

Relief rally for Cyprus soon fizzles

(3:16)

A bailout deal for Cyprus to avoid bankruptcy gave the markets little boost in early trading. But then markets turned sharply south.

Evan Lucas, a strategist at IG Markets, said the Cyprus deal calls into question the safety of bank deposits. “The next time one of these countries asks the European Central Bank for funding, the bank could come back and tap them on the shoulder with a similar deal Cyprus has now agreed to,” he said.

The U.S. Treasury Department in a statement backed the Cyprus deal, saying the agreement “fully protects insured depositors, which is important, while resolving and recapitalizing troubled banks.”

Popular Bank of Cyprus — also known as Laiki Bank — will be split into a “good” and a “bad” bank. The good bank will then be folded into Bank of Cyprus, along with all of its insured deposit accounts of under €100,000 and all performing assets. Deposits of more than €100,000 would be retained in the residual, so-called bad bank. Details of how much of a haircut larger deposit holders would have to take weren’t disclosed.

Reuters

Stacks of Swiss franc, Euro and U.S. dollar bank notes on display

“Cyprus may be too small to matter much economically to the euro area, but the events around the bailout are significant and contagion remains a risk,” Michala Marcussen, global head of economics at Société Générale, wrote in a note to clients.

Kathleen Brooks, research director at Forex.com in London, said that while the Cyprus deal is expected to be ratified by the German and Dutch parliaments, “there is a risk of some opposition in Berlin especially as we are less than six months away from federal elections in Germany.”

The lack of government in Italy was also weighing on the euro, she noted.

Also on Monday, Moody’s Investors Service said the crisis in Cyprus had negative implications for the credit ratings of the region’s sovereigns.

“Even if negotiations are successful and Cyprus remains within the euro area, policy makers’ recent decisions raise the risk of deposit outflows, capital flight, increased bank and sovereign-funding costs and broader financial market dislocation,” Moody’s said in a statement.

The ICE dollar index
DXY, +0.48%
which gauges the greenback’s performance against six major global units, climbed to 82.886 on Monday from 82.387 on Friday afternoon in North America.

The WSJ dollar index
BUXX, -0.05%
a measure of the currency against a slightly wider basket, rose to 73.47 from 73.16 on Friday.

Among other major currency pairs, the British pound
GBPUSD, +0.05%
was trading at $1.5176 compared with $1.5229, while the Australian dollar
AUDUSD, +0.09%
edged up to $1.0461 from $1.0446.

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